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Protecting Your Investment: Understanding the Financial Landscape of Your Dealership Construction Project

From identifying issues early in the process to revising procedures to comply with contracts, there is much involved to see a construction project come to fruition, beginning with cost review.

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From identifying issues early in the process to revising procedures to comply with contracts, there is much involved to see a construction project come to fruition, beginning with cost review.

Anyone who owns and operates a vehicle dealership understands that housing your inventory is just as important as the inventory itself. Dealerships are frequently required to upgrade current facilities or build new ones, a process that involves a firm grasp on construction contractsThis is where the assistance of a business advisory firm with a designated dealership services team comes into play. 

From identifying issues early in the process to revising procedures to comply with contracts, there is much involved to see a construction project come to fruition, beginning with cost review. This important preliminary action is the first step toward protecting a dealer’s investment, for it illustrates fiduciary responsibility, assesses cost savings measures and can identify projectrelated issues and related correction. It’s all about protecting your investment.  

Among various types of construction contracts, the most common is the Guaranteed Maximum Price (GMP) contractThis is typically a Cost Plus contract with a Guaranteed Maximum Price, which means construction costs plus a fee not to exceed a set amount. There exist various highrisk areas related to these contracts, which should be monitored and controlled by the dealership owner. Those risks include: 

Labor rates:  Rates are billed at higher rates than contracted and/or for incorrect labor classification. As an example, apprentices/interns are billed as experienced craft labor. 

Equipment rates:  Amounts billed for equipment not on-site or unnecessary for the project. 

Labor hours:  Salaried employees billed for over 40 hours; hourly workers billed for excessive hours.

Pre-construction costs:  Lack of proper tracking of pre and postconstruction costs resulting in amounts billed in excess of contracted allowable amount. 

Allowances:  Billedfor expenses – in addition to allowances such as office supplies and mobile phones – can lead to doublebilling and increased reimbursable costs. 

Miscellaneous expenses:  Meals, entertainment and travel expenses billed in excess of what is allowed per the contract. 

Missing support:  Amount billed not supported by invoices. 

Duplicate invoices:  Amount billed for previously paid labor or materials. 

Change orders:  Amounts billed for change orders not supported with cost estimates, bids or actual cost support. Excessive unused allowance and/or contingency funds are red flags for costs passed through change orders. 

Subcontractor contracts and payments:  Back charges not passed through, markups incorrectly calculated, duplicate change orders, errors in payment application.

There’s much to consider, review, monitor and evaluate when making an investment this large. At blum, we know the challenges dealerships face, from understanding construction contracts to facilitating financing to handling audits, to helping select inventory methods and dealing more effectively with manufacturers.  

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